Mortgage Predictions: Inflation's Comeback Isn't Good for Homebuyers
A higher-than-expected inflation report will delay interest rate cuts, again.
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The mortgage market was calmer than usual in recent weeks, with rates holding steady just below 7% since late January. But prospective homebuyers should brace for some turbulence.
Wednesday's release of the Consumer Price Index for January showed inflation rising by 3% over the past 12 months, above market expectations. Strong economic data tends to drive up bond yields, which translates to higher mortgage rates.
Everyone is watching how this new data will influence the Federal Reserve's interest rate decisions in the coming months. After making three interest rate cuts last year, the central bank has signaled it's in no rush to continue lowering rates.
The unknown impacts of the Trump administration's heavy-handed tariffs and other policies — which are likely to be inflationary — complicate the outlook even further. High inflation that moves away from the Fed's annual target of 2% will keep borrowing rates higher for longer.
According to the CME FedWatch tool, which tracks market expectations for interest rate adjustments, the likelihood of the next rate reduction has shifted from May to July or even later. Some experts say larger-than-expected price surges could keep the Fed on its hands until the end of 2025 or early next year.
Though the Fed's monetary policy decisions only indirectly impact the mortgage market, higher inflation and higher interest rates usually translate to more expensive mortgages for borrowers over the long term.
Tariffs, the Fed and interest rates
Most economic forecasts call for a gradual decline in mortgage rates over the course of 2025, but not by much. Fannie Mae expects average 30-year fixed mortgage rates to hold above 6.5% for most of the year.
That forecast is tied to expectations for cooler inflation, a weaker labor market and at least one or two rate cuts by the central bank, none of which seem imminent. There's also the threat of tariffs, which could negatively impact housing affordability, putting upward pressure on borrowing rates and the cost of building materials, like lumber, used to build new homes.
Economists have varying opinions on tariffs and their impact, with many noting it's too soon to predict how the economy will fare. Some say any possibility of heated trade wars will be inflationary in the long term as companies pass on price hikes to consumers, diminishing the possibility of the Fed easing rates. Others see tariffs as only sparking a temporary jump in prices that wouldn't affect the Fed's rate-cutting path.
Along with inflation, the Fed is also weighing employment data. If the job market remains robust by official standards, borrowing rates will definitely stay high. Interest rate hikes are generally used to slow the economy, whereas interest rate cuts are typically used to stimulate it.
However, if labor data weakens (there's an increase in unemployment, for example) the Fed could proceed with lowering interest rates. Logan Mohtashami, lead analyst at HousingWire, still expects the Fed to make two interest rate cuts this year, but he isn't banking on dramatically lower mortgage rates.
"Rates will only drop toward 6% in response to a significant economic or labor concern in 2025," said Mohtashami.
The bottom line is that the Fed is likely to wait until inflation is under control or the job market softens before making any big moves, which will keep upward pressure on mortgage rates.
Expert tips for homebuyers
It's never a good idea to rush into buying a home without knowing what you can afford, so establish a clear home-buying budget. Here's what experts recommend before purchasing a home:
💰 Build your credit score. Your credit score will help determine whether you qualify for a mortgage and at what interest rate. A credit score of 740 or higher will help you qualify for a lower rate.
💰 Save for a bigger down payment. A larger down payment allows you to take out a smaller mortgage and get a lower interest rate from your lender. If you can afford it, a down payment of at least 20% will also eliminate private mortgage insurance.
💰 Shop for mortgage lenders. Comparing loan offers from multiple mortgage lenders can help you negotiate a better rate. Experts recommend getting at least two to three loan estimates from different lenders.
💰 Consider renting. Choosing to rent or buy a home isn't just comparing monthly rent to a mortgage payment. Renting offers flexibility and lower upfront costs, but buying allows you to build wealth and have more control over your housing costs.
💰 Consider mortgage points. You can get a lower mortgage rate by buying mortgage points, with each point costing 1% of the total loan amount. One mortgage point equals a 0.25% decrease in your mortgage rate.
More on today's housing market
- How the Federal Reserve's Decisions Impact Mortgage Rates
- Why Fed Rate Cuts Aren't a Cure-All for High Mortgage Rates
- Most Homebuyers Won't Budge Until Mortgage Rates Drop to 4%, CNET Survey Finds
- You Might Be Eager to Buy a House, but Homeowners Are Holding Tight to Their Mortgages
- Despite Lower Mortgage Rates, Another Refinancing Boom Isn't Likely. Here's Why
- Forget Mortgage Rates. Americans Say They Can't Even Save for a Down Payment